Gauge Theory of Arbitrage

“Quantum forces go to market”

Paul Parsons, “Virtual money-go-round”, The Guardian, October 30, 1997

“…his arbitrage field  model elucidates opportunities for profit that were not envisaged by the original  Black-Scholes equation”

Gary Stix, “Calculus of risk”, Scientific American, May 1998

“Ilinski and Kalinin’s first triumph is to derive the entire Black-Scholes-Merton (BSM) theory from the heart of the gauge theory. That in itself is quite an achievement. But there’s more: just as quantum theory “corrects ” Newton’s laws of classical physics, so Ilinski and Kalinin’s calculations correct the BSM theory.”

Nicholas Dumbar, “Market Forces”, NewScientist, April 1998

Real markets are full of “mispricing” opportunities as defined by equilibrium pricing models. Magnitude and life span of these opportunities broadly depend on money available to arbitrage and market friction. Pricing impact of these factors is especially noticeable in some illiquid and non-transparent markets. As a result one might think that only obscure and illiquid OTC and complex financial instruments demonstrate such mispricing opportunities. However, standard portfolio theory also requires accounting for certain virtual arbitrage corrections as changes in market positioning and changes in market factors might have same typical time.

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Back to pages Kirill Ilinski, Reseach